When the world’s best investor, Warren Buffett, speaks, investors across the globe listen.
So when Buffett, otherwise known as the Oracle of Omaha, decided to purchase US$9.3 billion (AU$12.76 billion) of one particular stock through his company Berkshire Hathaway, ears pricked up worldwide.
Berkshire Hathaway already has billion-dollar stakes in huge companies like Apple and Coca-Cola, but the business it chose to sink nearly $13 billion into was its own.
The massive buyback was revealed in Berkshire Hathaway’s third quarter earnings report, and is the largest-ever buy back the company has ever made in a single quarter.
It trumps the previous quarter’s stock buyback of US$5.1 billion, which was a record itself when it happened.
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It amounts to more than 45 million total shares at an average price of $205.73 per share across the three months to September. That’s nearly 2 per cent of its total stock.
Back in 2018, Buffett amended his company’s buyback plan to allow himself and vice chairman Charlie Munger the freedom to purchase company shares when they believe the shares are trading below their intrinsic value.
Prior to this, the company wasn’t allowed to buy back shares unless they were trading for 120 per cent of their intrinsic value or less.
There’s speculation that Buffett also repurchased a further US$2.4 billion of Berkshire stock in October, given the company’s outstanding shares reduced further between 30 September and 26 October.
Why did Warren Buffett buy Berkshire Hathaway shares back?
Companies often repurchase stocks when stocks are undervalued, which can occur due to poor short-term performance, or just a general bearish sentiment among investors.
Both of those are true for Berkshire Hathaway this year.
After-tax earnings from Berkshire Hathaways’ railroad business decreased 8.1 per cent in the third quarter, which the company attributed to the negative effects of Covid-19, and earnings from its manufacturing, service and retailing businesses also declined 4.4 per cent.
Sales in its energy businesses and insurance categories also declined, the report stated.
The economic fallout from the Covid-19 pandemic has also induced a bearish sentiment among investors across the globe, with countries falling into recession as a result of lockdowns.
“The buyback remains attractive, in my view, given that the valuation is still below 1.2 times book value,” Edward Jones analyst James Shanahan told Business Insider.